The Granny Tax
Is George Osborne Really Mugging Our Grannies For Their Werther’s Originals?
In his budget speech on 21st March 2012, the Chancellor, George Osborne announced his intention to remove the separate personal tax allowance for pensioners that was introduced by Winston Churchill in the 1920s. This has sent a shockwave around the country, not least because the plan was completely unexpected. It was also thrown into sharp relief by the well trumpeted or should that be leaked decision to give top rate tax payers a 5% cut in their personal tax bills. Hence the headline grabbing term ‘Granny Tax’ that has dominated the media today and I would like to start by apologising for my use of this phrase. It has been patronisingly used in order to elicit sympathy for the aging and purportedly vulnerable victims of this tax change. The reality is, that there is more to these changes and the actual impact on the over 65s than the rhetoric being bandied about would suggest. Ros Altmann, the director of Saga issued a statement describing the removal of this tax perk for the elderly as an
“outrageous assault on decent middle-class pensioners”, another dreaded “stealth tax”.
Others will point out that pensioners have, until now, been relatively well insulated from the austerity cuts. They will point to the free television licence for all those over 70 regardless of financial status, their exemption from paying National Insurance contributions and the winter fuel allowance that is given to all pensioners where, again, wealth is no barrier to receiving the benefit. Indeed, Tory businessman Steve Norris openly admits to spending his on Claret. I wouldn’t completely support this line of argument. I can see a justification for removing the fuel allowance from the wealthiest pensioners and redistributing it to the lower income elderly who really need it. But, I also believe that such a viewpoint ignores the fact that record low interest rates which have depleted savers’ incomes have impacted on fiscally prudent pensioners.
So have pensioners been unfairly affected in this budget and is there a valid reason for this policy?
Firstly, on a positive note the weekly state pension will be increased by £5.30 but this rise won’t be effective until April 2013. With regard to tax, those aged 65 to 74 will enjoy a taxable allowance of £10,500 from April which means that their allowance is and will remain greater in the short-term than that of the working population who are under 65. The under 65s will pay tax on any income over £8105 from next financial year. For those aged 75 and over the tax allowance will rise to £10,660 at the same time. But these changes mean that from 2013 the increase in tax allowance for over 65s will be frozen. The aim, it seems, is to freeze tax allowances for over 65s until all other tax allowances have caught up. In addition, those reaching 65 after 5th April 2013 won’t receive the extra allowance at all.
The result is, that whilst no-one will have cash taken from them they won’t be as well off as they thought they would be. Critics of this move suggest that it would have been fairer to increase the under 65s’ tax allowances at a faster rate until they caught up rather than arbritarily freezing the over 65s’ allowances. They also claim that this doesn’t allow those approaching 65 to prepare sufficiently for the unexpected drop in income.
Another point for consideration is that any extra allowance is gradually removed from those with an income of between £24,000 and £29,000 with those receiving more than this having no extra allowance. So the pensioners being hit by this cut in income are sensible men and women who have worked hard all their lives, saved towards their retirement and should now be reaping the rewards of their hardworking lifestyle. They are therefore, middle and low income citizens for whom this move will have a very real impact. According to the BBC article:
Figures from HMRC show that, taking inflation into account, this will leave 4.41 million people worse off than they would have expected, by an average of £83 a year in 2013-14. People due to turn 65 after 5 April 2013 will miss out on an average of £285 compared with what they expected in 2013-14. The biggest loss is £322 that year.
According to the Chancellor himself, it was:
“a major simplification”
and
“No pensioner will lose in cash terms.”
It does however, seem to me to be a logical step given that the retirement ages are being steadily increased in the years ahead. In terms of the Government’s tax simplification strategies this is an emminently sensible move as over time we will all end up on the same tax allowances based simply on income rather than age and income. On the whole then, I am of the opinion that the move was inevitable in light of the future we face with regard to pensions and pension ages. But to remove valuable income from any low and middle-income section of society is unfair.
Is there a fairer way?
My first thought on this is a question: Why are pensioners paying tax on their pension to begin with? We pay two forms of tax when we earn, PAYE and NI which contributes to our state pension. We pay tax on our savings and when we spend our disposable income we pay tax on just about every transaction in the form of VAT. Surely there must be some point in our 3 score years and 10 at which we gain a small relief from the incessant and lifelong tax burden. Even as pensioners we would continue to pay VAT on our consumables and tax on our savings.
I would suggest that in order to restore some sort of balance any pension income is removed from tax and tax allowance calculations. This would mean that anyone over 65 would only pay income tax on any income that was not pension and that exceeded the tax allowance.
Benjamin Franklin once wrote:
“In this world nothing is certain but death and taxes.”
That may well be right, but why should we have to pay taxes until death?
Filed under: Policy Making and It's Effectiveness | Tagged: Budget, Budget 2012, Extra Tax Allowance, George Osborne, Granny Tax, Pensions, Tax, Tax Allowance | 2 Comments »